India losing sheen as offshore R & D hub

AGENCIESFeb 20, 2008, 11.35am IST

BANGALORE: India used to be seen as the perfect offshore research and development hub for global firms seeking to tap its low-cost and supposedly vast engineering talent pool to devise products for world markets.

Companies including Microsoft, IBM, Intel, AMD, Google, Motorola, Yahoo!, Cisco and Siemens have opened research and development centres in India, drawn by payroll costs that were once a quarter of those in the US and Europe.

But the cost advantage is fading and engineers trained in basic research are harder to find, reducing India's appeal, says Zinnov, a consultancy that advises overseas firms on research and development issues.

"Some companies witnessed a 20 per cent rise last year in the cost of running their research and development operations in India," Zinnov chief executive Pari Natarajan said in an interview.

"If this trend continues, the cost advantage of doing research and development in India compared to the US will go away," he said, predicting a shakeout in the research and development offshoring market.

India is home to 594 research and development facilities set up by overseas firms that invested a combined $5.83 billion, according to Zinnov.

Rising costs and a shortage of skilled workers have also hurt other industries from software to retailing in an economy that has expanded at an annual average of 8.6 per cent over the past four years. But the research and development offshoring market has received scant attention.

"Costs are going up all over, and we are also facing a shortage of shop floor workers," said Anjun Roy, economist at the Federation of Indian Chambers of Commerce and Industry.

"There is a need to improve skill sets in a lot of areas." Like software makers, research and development centres whose expenses are incurred mainly in rupees were hurt by a more than 12 percent rise last year in the value of the Indian unit against the dollar.

Wages jumped about 15 per cent as companies fought to hire and retain hard-to-find engineers skilled in research.

India turns out more than half a million engineers every year, but institutions do not train them in basic research, limiting the available talent pool to no more than 100,000 people, said Natarajan.

The shortage may set back the ambitious expansion plans announced by companies such as networking giant Cisco, which said in October that it plans to triple its headcount in India to 10,000 in three years.

"It's going to be very difficult for companies which have very aggressive hiring targets," Natarajan said. "It's almost impossible to hire unless you compromise on the quality of talent."